CEO positions Maybank to withstand the worst of crises and seize the best of opportunities
OF THE three front-runners for the top job at Malayan Banking Bhd (Maybank) back in August 2013, Datuk Abdul Farid Alias was the chosen one.
While his two peers left to helm other banking outfits, Farid, who had before that been the deputy president and head of global banking at the group, quickly settled into his new task.
But not without some trepidation.
“For a while, fear sank in. Maybank is, after all, an institution of its own,” he recalls the early days.
Speaking to StarBizWeek in a rare interview, the low-profile president and CEO of the country’s largest lender says because of such a reputation, Maybank could not and cannot afford to make “big mistakes”.
But while making the big mistakes was something he could control to a certain extent, what Farid couldn’t foretell was how bad the external environment was going to be a few months into the role.
In late 2014, oil prices, which had already been weak for some time due to an oversupply situation, crashed below the crucial US$70 per barrel level, dragging with it the markets and currencies.
The worst came in February 2016 when crude hit a low of US$26 per barrel before starting to trend up amid volatility.
Needless to say, many of the bank’s clients whose fortunes were closely tied to the price of the commodity were affected, impacting its own business as well.
“Conservative” is a word Farid uses a lot during the interview.
He uses it to describe the banking group on the whole, and to describe its people.
It’s also probably one of the traits that has helped the banking group, the fourth largest in the region, hold steady in the tough times.
Despite a marginally lower net profit in 2016 compared to a year earlier due to larger-than-normal provisions for doubtful debts, Maybank managed to chalk up a net profit of RM6.7bil.
Biting the bullet
In 2016, the banking group made a large provision amounting to RM3bil, following its stance to reschedule and restructure credit facilities of customers thought to be potentially vulnerable to the weaker global economic conditions.
Farid describes it as “the right thing to do”.
“We decided to take the hit much earlier on... out of the RM3bil impairment that we provided for last year, 70% or RM2.1bil of it was made in the first half.”
He says the bank has built up a strong capital base due to its conservative and prudent stance that makes it well prepared to face any external headwinds and the potential impact of the new, stricter accounting standard, MFRS9.
Maybank’s total capital ratio stands at almost 20% and is the highest not only in Malaysia but also in the region.
Core equity tier-1 (CET-1) ratio - which indicates a bank’s overall financial strength – currently stands at 13.99%.
Assets-wise, it was at RM736bil as at the end of last year. Closest rival CIMB Group Holdings Bhd had an asset base of RM486bil over the same period.
Regionally, Maybank ranks fourth after Singapore banks DBS Bank, OCBC Bank and UOB Bank, while CIMB is at fifth placing.
Among Maybank’s key-performance-indicator targets for this year are a return on equity (ROE) of 10%-11%, group loans growth rate of 6%-7% and a group deposit growth of 6%–7%.
Although the overall economies worldwide have started improving alongside commodity prices, true to Maybank’s conservative nature, Farid is not celebrating just yet.
“We can’t say if the worst is over yet... however, we are prepared even for the implementation of the MFRS9.”
Still, investors have been chasing its stock together with other finance stocks, predicting that banks will do better this year.
The Maybank stock has gained 8.54% since the beginning of the year to close at RM8.90 yesterday. At this price, it is trading at a price-to-earnings ratio of 13.17 times, while its price-to-book ratio stands at 1.32 times.
The MFRS9 effect
One of the main effects of the implementation of the MFRS9 on banks – both here and overseas – would be the requirement of higher provisions, namely, on asset classes that have long tenures.
What this means is that when the new standard comes into effect in January 2018, banks are to gauge the expected losses for the entire lifetime of a long-term asset and set aside the necessary provisions.
“Our provision level will go up, especially for long-dated assets like mortgage and infrastructure assets,” says Farid.
However, once the amount (of provisions) has been decided, this amount will be knocked off against the bank’s reserves.
“When this happens, shareholder equity is going to come down by that amount while earnings will remain the same. This means that the bank’s ROE will go up,” explains Farid.
Maybank’s ROE – which measures how much a bank can make with money shareholders have invested in it – is currently at 10.6%.
Still, he rules out the possibility of Maybank distributing more dividends to shareholders.
“In our case, we are preparing the additional reserves as part of our counter cyclical buffer and MFRS9 so that we don’t have to struggle and raise capital to meet the minimum standard when the time comes.”
The last time the banking group undertook a rights issue was in 2009 when it needed to be recapitalised to pay for its acquisitions overseas, which included Indonesia’s PT Bank Internasional Indonesia Tbk.
That acquisition, done at 4.65 times price-to-book value, did not go down well with investors, as it was deemed expensive, also given the onset of the global financial crisis during that period.
Reining in cost
When it comes to cost, Farid says Maybank benchmarks itself against Singapore banks.
He says Maybank, which has a cost-to-income ratio (CIR) of 47.3%, prefers to pit itself against its Singapore counterparts, as these have lower CIR than most banks in Malaysia.
On average, Singapore lenders have CIRs of between 42% and 45%.
“In the local scene, we are doing better than the industry with the exception of Public Bank Bhd, which has a CIR of 32%.”
“Among Singapore banks, DBS has a CIR of 42%, while OCBC and UOB’s CIRs are at 45%.”
Locally, apart from Public Bank’s CIR of 32%, AmBank’s ratio stands at 60%, while CIMB and RHB Bank’s CIRs are at more than 50%.
Farid says most banks in other parts of the region are not able to recreate the kind of low-cost ratios that Public Bank can boast of.
“One other bank which can do this is perhaps Bank Central Asia in Indonesia, which has a CIR in the 30% range.”
“If you look at our structure, the markets we serve and the kind of services we offer, we are comparable to the Singapore banks. Going forward, we are finding ways to better understand how to structure ourselves to chase them.
“We don’t have a specific target in mind, but are looking to bring the ratio down to the thereabouts of our Singapore peers.”
Notably, at 47.3%, this is Maybank’s lowest CIR in six years.
In 2015, it stood at 48.2%.
Analysts say Maybank has been able to bring down its costs partly due to natural attrition.
Farid discloses that the bank had mulled over a voluntary separation scheme like some other banks, but ruled it out given its high natural attrition rates.
Because of this, the group was able to reduce its head count by 2,000 to 43,900 employees last year.
“In 2015, for every ringgit that we earned, the cost of doing business was 49 sen. Last year, the cost of doing business was 47 sen for every ringgit that we earned.
“Out of that 47 sen, the cost of people was 25 sen as opposed to 27 sen in the year before that.”
Not up for buying local banks
As a well-capitalised bank, it’s easy to assume that Maybank is considering mergers and acquisitions to extend its reach.
But it’s not leaning towards that. At least not for now.
“Yes, we have a lot of capital and we have shareholders who have the firepower to support us, but we can’t make foolish decisions,” he says.
“We are okay to be honest. Everything else being equal, any addition to Maybank in terms of size is not going to make much of a difference because we are already big (here) and nothing will add to our capabilities,” says Farid.
Having said that, Farid says the group is not ruling out buying any local bank completely.
There can be some consideration if the deal is “really, really compelling”.
If anything, Maybank’s focus on expansion from an inorganic standpoint is not on Malaysia but rather, outside of the country.
Even then, he says, it has not made a move because it wants to be “very, very careful before we take a step”.
He cites Maybank’s purchase of Singapore’s Kim Eng Holdings Ltd in 2011 as one of the investments which have paid off handsomely.
“We acquired them in 2011. Before that, we were only in Malaysia and couldn’t even win a mandate from the big companies in Malaysia, which were trying to sell equities or debts outside of the country.
“With Kim Eng, we suddenly got those deals, their distribution capability is very, very good.”
“That’s where we gain synergy not from cost but through new capabilities and markets.”
In terms of the group’s international business, Indonesia stood out for having shown an improvement in the last financial year, while Singapore took a hit because of its exposure to the beleaguered oil and gas market.
As for Cambodia and Vietnam, the results were quite decent, according to Farid.
“When you take a look at it in totality, it slowed down slightly because of several markets. For Maybank group to do well, every single part of our business has to do well.”
“So Malaysia, Indonesia, Singapore, the Philippines, Cambodia and the various segments from consumer and wholesale banking, all have to move and then we will have a fantastic year like 2013.
“Anything short of that will be an okay year, like last year was an okay year.”
Profit-wise, Malaysia’s operations contributed the bulk at over 70% in financial year 2016 (FY16), while Singapore and Indonesia came in at 9.9% and 8.9%, respectively.
“Indonesia is improving. It recorded the highest profit ever at 1.9 trillion rupiah in absolute value. That’s a record.
“Singapore remains an important market and it should be looking better.”
Malaysia, Indonesia and Singapore are considered “home markets”, contributing over 90% to group profitability. In Thailand, the group enjoys a thriving investment banking sector, Farid says.
“We have the biggest stock broking presence there and it’s profitable and consistent.
“It should look better this year, as last year it was somewhat affected.”
Farid describes the Philippines as a “very tough market to crack”.
“Our business there has been profitable since 2004. It took a while to turn it around and now we have retail, corporate, global banking and broking there.
“But the Philippines is a small market, mathematically, if you combine all the top-10 banks there, Maybank will still be bigger than them...,”
On the whole, analysts are expecting Maybank to turn in lower provisions in FY17.
MIDF Research in a recent report noted that it is sanguine on the group’s prospects in FY17, given that provisions are expected to come down as evident by the lower net credit charge off rate guidance and potential to maintain the momentum of loans growth and quality deposits growth.
“As such, we believe that we may see earnings recover in FY17. The only potential headwind will be its asset quality, but the management is proactively monitoring the situation.”
Firming up successors
Farid takes very seriously the mandate that has been given to him with regards to succession.
For example, for every level, starting from the group executive committee (exco) all the way down, the group needs to have a list of successors and a minimum of three names for this.
“We need to have three unique successors, meaning that you cannot be a successor to more than one person,” he explains.
After the successors are named, they need to go through a slew of processes, including identifying their weaknesses, strengths and training.
Discussions among all the exco members and the board members will also take place to address any disagreements.
Additionally, as part of the group’s succession planning and efforts to create a diversely skilled C-suite, Maybank had on July 1, 2016 started a rotation of three exco members.
That rotation involved three roles – group chief financial officer, group head of global banking and group head of Islamic banking, and CEO of Maybank Islamic.
The rationale behind the rotation of top management within the group is to strengthen and improve the roles with new ideas from the new leaders, and also for the continuous development of their leadership skills, Farid explains.
“The board’s expectations are very wide and very big. Learning from that, I said I need to rotate my successors. They (board) want to see some evidence, which means that it (rotation) has to be done over a period of time,”
However, going by Maybank’s performance and strength that it has built up so far, there will unlikely be a need for a successor to Farid in the next few years.
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